Trump likely to name Fed chair by early November

The dollar hit its highest in about two weeks versus the yen, supported by this week's rise in U.S. bond yields, with U.S. President Donald Trump set to make a decision in the "coming days" on Yellen, who is also one of the five candidates being considered for the job.

Taylor is known as a proponent of a rule-based monetary policy and according to his formula, known as Taylor rule, the Fed funds rate needs to be much higher than the current target of 1.0 - 1.25 percent.

That has left the gap between 10-year bond yields in Germany and the U.S.at around 193 basis points and close to its widest levels in four months.

Currency economist Lee Hardman, believes the bank would "not be surprised" to see spike in the dollar between 3 and 5 percent initially if Taylor is chosen.

"A potential shift in strategy towards a more rules-based approach for setting policy would be seen as less supportive for financial markets and increase the likelihood of the Fed raising rates materially more in the coming years than is now priced in", Hardman said.

Trump has an interview scheduled on Thursday with current Fed Chair Janet Yellen, whose term expires in February.

The U.S. dollar index, which measures the greenback's strength against a trade-weighted basket of six major currencies, was up 0.30% at 93.64 by 05:15 a.m. ET (09:15 GMT), its highest since October 9.

"Depending on how the dollar goes, we might look at $1,250-60 as the next stop for gold to trade down".

Markets are wary of chasing the currency lower before a European Central Bank policy meeting next week.

The Australian dollar was 0.14 percent lower at $0.7841 as its rally last week to a two-week high on upbeat Chinese data lost momentum.